The Indian Government introduced the Goods and Services Tax (GST) on July 1, 2017, with a primary aim of modernising the indirect tax framework of the nation. It enabled us to eliminate various indirect taxes and consolidate all the obligations under one more streamlined umbrella. It also reduced administrative difficulties and economic inefficiencies. This new tax has different impacts on businesses of different sizes. Keep reading as we explore the challenges GST brought to small businesses and find out the solutions.
Understanding the Objective Behind GST
The GST system was conceptualised to settle the principal concerns of the pre-existing tax system. With these objectives, the GST legislation aims to make the Indian tax system more transparent and efficient:
- Eliminate the complex system of taxation, where the scope of double taxation became an issue.
- Simply tax administration through integrating various taxes, like excise duty, service tax, and VAT, under a single system.
- Power economic integration through establishing a national market and eliminating state-level tax obstacles.
- Increase revenue accrual through curbing tax evasion and improving compliance.
Important Changes the GST Regime Implemented
Small businesses were particularly affected by drastic changes in the tax regime, such as:
- Unitary tax regime for both goods and services nationwide.
- Dual taxation model; CGST and SGST for intra-state supplies.
- Integrated GST (IGST) for inter-state supplies.
- Tax bands for categorising goods and services, from exempted necessities to highly taxed high-end goods.
Post-GST Challenges for Small Businesses
GST, while targeting simplification, faced severe implementation hurdles from small businesses:
- Compliance Needs: The registration, billing, return-filing, and periodic updates mandated under GST were an additional burden on small businesses.
- Management of Invoices: The effort and time required in sustaining GST-compliant invoices made day-to-day operations more difficult.
- Limited Knowledge: Small business owners are usually not tax compliance trained, and opposing interpretations of GST law only add to the complexity.
- Lengthy Filing Procedure: Missed deadlines translate into fines, so it is imperative to remain perpetually on schedule.
- Cash Flow Issues: GST on expenses has to be paid in advance, whereas input tax credit (ITC) is realised only when sold, locking up working capital.
- Increased Tax Liability: A reduced threshold of GST registration subjects more small and medium enterprises to the tax burden.
- Recurring Rate Revision: Small businesses have to keep themselves abreast with rate revisions to prevent mis-pricing and compliance mistakes.
Opportunities Created by GST for Small Businesses
All notwithstanding its challenges, GST has created new opportunities:
- Lesser Compliance Burden: The Single portal system got rid of the previous, more complicated multi-tax filings.
- Level Playing Field: The removal of multiple taxes levelled the playing field between small and large businesses.
- Access to Input Tax Credit (ITC): Firms can now claim back taxes paid on inputs, reducing the overall tax burden.
- Transparency and Efficiency: GST helps bring about a cleaner and more transparent business environment.
- Faster Movement of Goods: The removal of inter-state check posts and Octroi charges has streamlined logistics and deliveries.
- Warehouse Optimisation: Companies are able to warehouse on a national scale and accrue cost and time benefits.
- Composition Scheme: Small and medium enterprises with a turnover of under ₹1 crore benefit from the GST composition scheme, which simplifies tax returns and lowers tax rates.
- Business Formalisation: GST registration helps companies access credit, loans, and government schemes, leading the way to growth.
GST Adaptation: Tips
To adapt to these changes smoothly, small businesses can implement strategic measures:
- Invest in GST-friendly software to simplify compliance and eliminate human error.
- Train staff for the smooth use of digital tools.
- Clarify your GST and payment liability and forecast the cash flow effect beforehand.
- Maintain electronic records of invoices and payments for legal and business transparency.
- Remain updated on changes to rules and regulations, and utilise online information for staying updated with compliance changes.
- Consult professional experts as needed in order to help avoid misinterpretation or non-compliance.
Leveraging GST for Business Growth
With compliance achieved, businesses can use GST to enhance operations:
- Maximise costs through ITC claims and optimise supply chains for tax gain.
- Streamline processes by automating invoices and data handling.
- Gain trust through transparency, drawing in customers and investors both.
- Increase market access through interstate transactions without additional taxation hurdles.
- Improve supplier relationships through prompt GST and payment settlements.
Conclusion
Although the implementation of GST itself was a problem for small firms, there is no denying the long-term advantages of a single tax system. Small firms can not only survive but also maximise the potential of GST to expand and flourish in a more transparent economic system with some smart strategies.